Tax Reform Options: Incentives for Homeownership

Comments for the Record

United States Senate Committee on Finance

Tax Reform Options: Incentives for Homeownership

Thursday, October 6, 2011, 10:00 AM

215 Dirksen Senate Office Building

By Michael Bindner

Center for Fiscal Equity

Chairman Baucus and Ranking Member Hatch, thank you for the opportunity to address this topic. As ending the Mortgage Interest Deduction seems to be the tax benefit everyone wishes to cut in order to balance the budget, this is a timely topic indeed.

The scheduled witnesses have undoubtedly pointed out that on one side, people took out long term loans in expectation of having this deduction, and therefore limiting it essentially alters the term of their contract. Witnesses on the other side have likely pointed out that this deduction is mostly used when loan balances are high and payments are mostly going to interest, which is not the case later in the loan.

For lower income earners with smaller loan values, or taxpayers with more mature loans, interest may be so low that the standard deduction is more lucrative – unless of course people harvest their equity to pay down other debt or make purchases – however given the state of the economy, I doubt many are advocating that strategy today.

Finally, we sure that someone will mention research that shows the likelihood that no one forgoes a vacation property or upgrades to more luxurious housing because of tax policy, although wealthier homeowners certainly appreciate the tax deduction and may contribute money to keep it. This is a privilege that most borrowers don’t have.

In our conversations with other tax reform advocates, we get the impression that they think that repealing the MID may be the sweet spot in getting tax reform done to cut the deficit and lower rates, as if wealthy tax payers won’t notice their tax bills rising. As people who make more are generally more savvy at about tax policy, we find such a view lacks basic credulity. Taxes must indeed go up for high earners, either through compromise or, when the economy eventually recovers, through the eventual expiration of the 2001 and especially the 2003 rate cuts on capital gains and dividends – which are essentially automatic if no compromise is reached.

We also do not believe that the housing sector will roll over for the expiration of the MID, as is likely obvious from today’s hearings and comments for the record.

The long term problems on the spending side are as important to deal with as the loss of tax revenue from extensions of the Bush/Obama tax cuts, although we believe the latter drives this process. The only reasonable answer to the former problem, however, is to change the demographics.

Life is essentially a Ponzi Scheme, especially as the society ages. This is especially true in modern societies with social welfare systems and market capitalism, but was equally true in ancient times when grandmothers encouraged the birth of grandchildren. Grandma is not stupid – she wants more kids around so she can continue to eat at the family table because kids become workers.

With the dissolution of extended family living, Grandma and now Grandpa rely on both the Social Security, pension and retirement savings systems. All of these require more workers to make things and pay taxes (even when productivity increases) and as importantly more people to buy things – something productivity raises can’t mimic. This is especially true for wealthier taxpayers who live off of dividends. You can’t eat a bond or stock certificate – someone must buy the underlying product.

For our retirement system to thrive, the thing we need most is not better financial schemes, but more children. As it happens, research shows that the biggest cost of growing a family is the cost of improved housing, although not necessarily purchased housing. This is especially true with the first child, but also with the first child of a different sex – particularly in later years.

Using the expiration of the Mortgage Interest Deduction to simply lower tax rates and pay down debt, if it can be accomplished at all, would miss a golden opportunity to instead expand the Child Tax Credit to something more resembling a living wage, especially if it is made refundable. As the committee may remember, this proposal is a key part of our tax reform proposal.

To refresh your memories, the Center for Fiscal Equity has a four part proposal for long term tax and health care reform. The key elements are

• a Value Added Tax (VAT) that everyone pays, except exporters,
• a VAT-like Net Business Receipts Tax (NBRT) that is paid by employers but, because it has offsets for providing health care, education benefits and family support, does not show up on the receipt and is not avoidable at the border,
• a payroll tax to for Old Age and Survivors Insurance (OASI) (unless, of course, we move from an income based contribution to an equal contribution for all seniors), and
• an income and inheritance surtax on high income individuals so that in the short term they are not paying less of a tax burden because they are more likely to save than spend – and thus avoid the VAT and indirect payment of the NBRT.


The expansion of the Child Tax Credit is what makes tax reform worthwhile. If the goal of tax reform is simply more revenue, that can be accomplished by eventual economic recovery and political gridlock through the automatic return to Clinton era tax rates. Funding health care can happen easily with premium increases, slight benefit cuts and eventual increases to the HI payroll tax. Expanding the child tax cut, however, may well solve the aging crisis.

Adding the Child Tax Credit to the employer paid VAT-like Net Business Receipts Tax (NBRT) rather than retaining it under personal income taxes saves families the cost of going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed throughout the year with payroll. In order to make room in payroll for an expanded child tax credit, salaries would be generally decreased, which both adds a stick to the carrot by encouraging families with less children to have more and removes the perverse incentive to fire older workers as they demand more money to feed their families, or simply because they make more due to seniority.

The only tax filing for most families required in such a reform would be for the employer to send each beneficiary a statement of how much tax was paid, which would be shared with the government. The government would then transmit this information to each recipient family with the instruction to notify the IRS if their employer short-changes them. This also helps prevent payments to non-existent payees.

The expansion of the child tax credit to $520 per child per month is paid for by ending the tax exemption for children, the home mortgage interest deduction and the property tax deduction. This is more attractive to the housing industry than the alternative proposal, which is to end or limit the credit and use the proceeds to help bring the budget into primary balance.

Assistance at this level, especially if matched by state governments may very well trigger another baby boom, especially since adding children will add the additional income now added by buying a bigger house. Such a baby boom is the only real long term solution to the demographic problems facing Social Security, Medicare and Medicaid, which are more demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform.

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.